Spanish minister says future of euro at risk

Economy minister says future of euro currency will "play out" in the next few weeks and will depend on Spain and Italy.

    Spain saw its bond yields shoot up again after the country's economy minister said that the future of the euro would be
    determined in the next few weeks and would depend on the stability of Spain and Italy.

    The interest rate on 10-year Spanish bonds stood rose 0.13 percentage points to 6.58 per cent in early trading on Friday. The rate was more than 5.4 percentage points higher than the equivalent German one, which is considered a safe haven for investors.

    Luis de Guindos, the Spanish economy minister, said in a speech on Thursday evening that Spain and Europe were at crossroads as speculation mounts over whether the country will need a bailout. The danger is that Spain's $1.24 trillion economy is far bigger than those of already bailed-out Greece, Ireland and Portugal combined.

    Spain's banking sector is laden with soured investments on real estate and the government needs $24bn to rescue just one lender, Bankia SA, at a time of recession and crushing unemployment of 24.4 per cent.

    "I don't know if we are on the edge of a cliff, but we are in a very, very difficult position,'' de Guindos said in a speech to
    business leaders in Sitges, a resort town near Barcelona.

    De Guindos said Europe needed new mechanisms, including one allowing the continent's bailout fund to inject capital directly into troubled banks rather than go through governments first. It also needs a pan-European bank deposit insurance plan like the United States has, he said.

    Germany, however, opposes the idea because it fears it could be left paying for the bulk of new rescues.

    "The future of the euro is going to play out in the next few weeks in Spain and Italy,'' de Guindos said.

    'Senseless' rumour

    On Thursday, the International Monetary Fund (IMF) and Spain denied any talks on a bailout loan programme for Madrid, as Soraya Saenz de Santamaria, the Spanish deputy prime minister, met the global lender's chief Christine Lagarde.

    "There is no such plan. We have not received any request to that effect and we are not doing any work in relation to any financial support," Lagarde said after the two met on Thursday.

    De Guindos called the "rumours" that Madrid was discussing a rescue loan programme with the International Monetary Fund "senseless".

    The Wall Street Journal earlier reported that the IMF's European department had begun discussing contingency plans for an emergency loan to Spain as Madrid struggles to keep its banking sector afloat.

    But the IMF strongly denied any rescue was near.

    "The IMF is not drawing up plans that involve financial assistance for Spain. Nor has Spain requested financial support from the IMF," spokesman Gerry Rice told journalists.

    Historic rescue

    The meeting between the Lagarde and Saenz de Santamaria was "to discuss recent economic developments in Spain and the eurozone", he added.

    Lagarde called the meeting "productive" but otherwise gave no hint as to what was discussed.

    Speculation has mounted that Spain will seek a Greece-style rescue loan from the IMF and the European Union as the country endures economic recession and its banks crumble under the weight of massive bad real-estate loans.

    Earlier on Thursday, the EU pressed Madrid to urgently clear up doubts over its mammoth rescue of stricken lender Bankia, in a bid to calm markets.

    Bankia request to the state for $24bn to repair its books would be the biggest rescue in Spanish banking history.

    But the Spanish government is already under severe pressure to reduce deficits even as the economy shrinks and joblessness mounts.

    SOURCE: Agencies


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